Banco de Brasil

Claire Jones

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Public appearances

A busy week is in store for Jean-Claude Trichet.

On Saturday, the ECB president will speak at Jackson Hole at 17:00 GMT. On Monday, Mr Trichet travels to Brussels, where he will field questions from the European parliament on how to restore market confidence (some suggestions from Ralph Atkins and Chris Giles).

The president will be joined by Jean-Claude Juncker, Eurogroup president, Jacek Rostowski, Poland’s finance minister and Olli Rehn, the European commissioner for economic and monetary affairs.  The hearing takes place at 13.00 GMT.

On Thursday, ECB executive board member Jürgen Stark is a participant in a panel on Europe and global competitionRead more

Claire Jones

Central bankers this week have acted on fears that the global outlook could weigh on domestic growth.

The Central Bank of Turkey’s shock decision on Thursday to cut its policy rate to an all-time low in the face of strong growth and above-target inflation shows just how pronounced those fears are.

Japan and Switzerland have both attempted to counter their currencies’ rapid appreciations over recent weeks, which have occurred on the back of events in the US and the eurozone.  Read more

Claire Jones

This from the FT’s Joe Leahy and Samantha Pearson in São Paulo:

Brazil’s central bank has raised interest rates for the fifth time this year as the country battles inflation above official target levels. Read more

Claire Jones

Brazilian finance minister Guido Mantega’s distaste for QE2 is well known. The Federal Reserve may have decided to give Brasilia a little of its own medicine, however.

Research published on the Fed’s website over the weekend takes aim at Brazil’s use of reserve requirements – the proportion of a bank’s reserves that they are required to park at the central bank – as a tool to manage liquidity.

The use of reserve requirements for this purpose (rather than to combat inflation, as is usually the case), is especially pertinent at the moment given that the Liquidity Coverage Ratio has become one of the more controversial aspects of Basel III. Read more

Claire Jones

Macroprudential is the buzzword of the moment (as this post notes, policymakers are keen to slap the label on anything they can). But do macroprudential measures actually work?

Of course, that depends on defining what “work” means, which – given that there are no precise indicators of financial stability – is no easy task.

Around the cusp of the year, Brazil introduced its own macroprudential measures, which included higher capital and reserve requirements, and limits on vehicle financing. Their stated aim: “to allow the continuity of sustainable credit market developments” following rampant credit growth of 22% last year.

So have they fared? Read more

Brazil has raised rates half a point to 11.75 per cent, the second rise in three months. Copom, the monetary policy committee, voted unanimously for the raise to rein in inflation. A single sentence accompanied the decision, offering no clues as to the thoughts of policymakers on the future direction.

Prices rose 6.08 per cent in the year to February, above the central bank’s 4.5 per cent target, though within tolerance bands of +/- 2 percentage points. Given the strength of recent inflation, some analysts had expected a three quarter point rise in the selic rate. Significantly, though, food price pressures have receded in Sao Paolo, data showed today.

Alexandre Tombini, Brazil’s new central bank governor, has sought to establish his credentials as an inflation fighter with the release of a tougher-than-expected statement from the central bank. Mr Tombini, a central bank technocrat, replaced established hawk Henrique Meirelles in November. Analysts had feared the appointment might signal a closer relationship between central bank and finance ministry, and, ultimately, less rigour in monetary policy.

In the minutes of the central bank’s policy meeting of last week, released on Thursday, the institution warned about the need to restrain wage growth and public spending if Brazil is to meet its inflation targets. Wage rises were singled out as a particular risk facing the economy. [Bloomberg reports today that consumer, construction and wholesale prices rose 11.5 per cent in the year to January, exceeding expectations.]

“The prospective scenario for inflation has evolved in an unfavourable manner,” the central bank said in minutes from the last copom meeting, at which interest rates were raised 50bp. “The committee notes relevant risks arising from the gap in supply and demand.” Early indications from Ms Rousseff, president, and Mr Mantega, finance minister, suggest they are changing tune on fiscal spending, with both calling for budget cuts to help rein in inflation and the appreciation of Brazil’s currency, the real, against the dollar.

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Brazil has raised rates by 50bp to 11.25 per cent to try to bring inflation back to target. The central bank also introduced new reserve requirements for dollar short sellers recently, in an effort to counter inflationary pressure on the real. Prior to the rise, the selic rate had been on hold for about six months at 10.75 per cent (see chart).

Consumer price inflation ran at 5.91 per cent in the year to December, in the upper end of the target range of 4.5 per cent +/- 2 percentage points. This was the highest since at least December 2008, when the Bank’s historical series begins.

Banks betting that the real will go up have 90 days to comply with a new reserve requirement from the central bank aimed at weakening the real. The measure is the latest in a series of tools emerging markets are adopting to slow currency appreciation.

Financial institutions with short dollar positions must deposit cash – which will not earn interest – at the central bank. According to the release, the amount is worked out by formula (via Google Translate):

financial institutions should collect the Central Bank in the form of compulsory deposits, 60% of the value of the sold foreign exchange position that exceeds the lesser of: $ 3 billion, or heritage reference (PR). This compulsory deposit will be collected in kind and will not be paid. Institutions will have 90 days to fit the new rule.

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Interest rates might need an “adjustment” to stem the rise in consumer prices, Brazil’s central bank has said. The country’s key selic rate has increased several times since the cuts that followed the financial crisis, but levelled off at 10.75 per cent in June.

The Bank’s inflation report, released yesterday, suggested such a rise was imminent:

Under the inflation targeting regime, deviations in projected inflation from the target of such magnitude suggest the need for implementation, in the short-run, of an adjustment in the basic interest rate, in order to control the growth pace mismatch between the domestic demand and the productive capacity of the Brazilian economy, as well as to reinforce the anchorage of inflation expectations.

Some analysts have interpreted this as a January rate rise.

Banco Central do Brasil explained that the balance of risks associated with inflation had “evolved unfavorably since the release of last Report”. Read more